The Limits of Seedwrap Licensing

The question of overlapping patent and PVPA protection in turn implicates the licensing of patented plant varieties. The jurisprudence of utility patent licensing for plants could closely parallel the employment of GURTs and GURTs-enabled licences for plants, either because the technological protection confers exclusivity analogous to patent protection, or because the GURT itself is patented, and tampering with it may trigger patent liability. Patent rights are extensive, but they are not unlimited, and their exercise may be constrained by the doctrines of exhaustion, misuse, or by antitrust consideration. These doctrines might similarly be recruited to constrain analogous GURTs deployment.

The limitations on patent 'seed-wrap' licensing have been addressed in the Monsanto v McFarling12 litigation, another lawsuit dealing with seed saved in violation of a 'seed-wrap' licence. Prominent among defendant McFarling's arguments against the enforceability of the licence was that of patent exhaustion; the patentee's loss of right in a particular patented item after it is sold. Patent exhaustion is often compared to the first sale doctrine in copyright, as each constitutes a mechanism of a more general policy disfavouring restraints on alienation. In each case, an IP owner's rights in the physical object sold to another are exhausted, although the intellectual property rights (IPRs) in the intangible work remain. In the particular case of patent exhaustion, the patent owner rights to a particular embodiment of the claimed invention are exhausted after transfer, although he may still hold the right to prevent making, use, sale, offering for sale, or importation of the claimed invention.

But patent law differs from copyright in an important respect. In copyright, the division between the exclusive rights in the work and the right to dispose of the copy are relatively pristine. Copyright excludes only certain uses of the tangible copy, and first sale speaks to only one of these - the right of distribution. But unlike copyright's first sale doctrine, patent law's exhaustion doctrine is entangled with the exclusive rights of the patent owner, which include the right to exclude all uses. Thus, sale of a patented item is typically assumed to entail a licence for the normal and customary 'use' of the product - the purchaser would be highly unlikely to purchase a product, which he was excluded from using in any manner whatsoever.

In challenging the Monsanto 'seed-wrap' agreement, McFarling argued that Monsanto's rights in the seeds and their progeny were exhausted upon sale of the seed. The Federal Circuit looked to recent jurisprudence holding that patent exhaustion can be negated by explicit terms in the sale or licence of the patented product, reasoning that the restrictions in the 'seed-wrap' licence covered the seeds actually sold, and that the sale of the seeds conferred no implicit or explicit licence to 'construct new seeds'. Further, the court held that the new, second-generation seeds themselves were not subject to exhaustion, because they were not sold to McFarling, but were 'made' by him from the first-generation seeds that were sold.

This analysis is at best confusing, failing to separate the interconnected issues raised by McFarling's claim. The Federal Circuit plausibly answers the question as to whether the patent-holder's rights in the first-generation seed were exhausted, but simultaneously sidesteps the question of whether the patent-holder's rights in the second-generation seeds were exhausted. It is simply contradictory and nonsensical for the court to state that the sale conferred only the right to use the original seeds, and that the 'original sale of the seeds did not confer a licence to construct new seeds'. Using the original seeds necessarily entails the construction of new seeds; that is how seeds work. Soybeans in particular would be worthless if the licence to use them did not confer a licence to 'construct new seeds', i.e. a second generation of soybeans to be harvested. Although this may not necessarily be true of some other plants, such as cotton or flax, where the plant itself, rather than its seeds, is the desired product. But in the case of soybeans, the sale of the initial seeds must necessarily confer a licence to 'construct new seeds'. There is no other reason for the farmer to have purchased them.

Consequently, the question cannot be what usage constraints were placed upon the first-generation seeds - clearly they were to be used to generate additional seeds. The question is rather the legitimacy of the constraints imposed in the contract for sale of the first-generation seeds upon the use of the second-generation seeds, constraints requiring the purchaser to use the second-generation seeds for food or another end product, and not for planting. This is clearly a matter of imposing terms upon the purchaser of one product regarding another product, not yet in existence at the time of the first product's sale. Stated differently, the legitimacy of the transaction depends upon whether the licence for the use of the first-generation seeds can permissibly 'reach through' to constrain the use of the second-generation seeds.

The court seems to have realized this mistake, at least in part, in its subsequent opinion addressing McFarling's appeal from summary judgment, in which he claimed that the terms of the licence constituted a patent misuse, tying a licence for the first-generation seeds to a licence for the second-generation seeds.13 There the Federal Circuit acknowledged that McFarling would plant and harvest the first-generation seeds in an identical fashion, whether he planned to replant the second-generation seed or not - consequently, the licence must be imposing a prohibition on the use of the second-generation seed rather than on the firstgeneration seed. However, the court sidestepped the applicability of such a licence to the second-generation seeds, reasoning that since they must necessarily fall within the patent claims, a prohibition on their use fell within the scope of the patent; hence the prohibition could not constitute misuse.

It is worth noting that the use of upstream patent licences to constrain use of downstream products has become an issue of concern in other technologies, particularly in the pharmaceutical industry, where some commentators have suggested that the practice implicates both antitrust and patent misuse (Feldman, 2003). In the case of patented seed licences, the analysis is somewhat more complex; as the court noted in McFarling II, the derived product will always fall within the scope of the patent, which may or may not be the case with research products. But even though the second-generation seeds saved by McFarling fell within the scope of the Monsanto patent, this does not answer the question as to whether the licences for the first-generation and second-generation seeds were tied, let alone whether they were impermissibly tied. The analysis I have reviewed here demonstrates that a constraint on the use of the second-generation seeds would constitute at least partial revocation of the implied licence to use the second-generation seeds, arising out of the licence for the first-generation seeds. If the licences for each type of seed use can be said to function in different markets, and Monsanto's market power in the market for first-generation seeds is being used to leverage market power for second-generation seeds, then an argument for antitrust violation is at least feasible - and antitrust violations are per se misuse.

The court in McFarling rejected such claims as unproven, but this holding was primarily an evidentiary matter, without any serious analysis as to dimensions of the relevant markets and Monsanto's market power in those markets. In an increasingly consolidated seed industry, the concomitant concentration of patents and market power in the hands of a very few firms deserves more serious scrutiny. Under such conditions, the technological 'lock-out' effect of GURTs may be even greater than those of exclusive rights under patent law. I have suggested elsewhere that anticompetitive conduct and misuse constraints ought to apply in the context of digital rights management (Burk, 2003), and they could equally well prove applicable in some situations of GURT deployment.

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